Energy Spike Boosts January CPI

 


One of the most important components, given where we are in the economic cycle, was food. Food prices from grocery stores fell by 0.1%, but remained nearly 4% above a year ago. A sharp drop in the price of cereal and baked goods just barely offset a significant 0.5% jump in meats, poultry, fish and eggs. The cost of beef alone jumped 1.1% during the month, which is making it harder for families to feed their children.

Food away from home increased 0.3% during the month. Higher prices of inputs on proteins likely contributed to those gains. Credit and debit card data showed a spike in takeout dining as $600 stimulus checks hit bank accounts, which provided much needed support for small restaurants still in business. The gains likely lifted the fortunes of larger, fast-food establishments.

The core CPI (excluding the volatile energy and food components) flatlined during the month. Medical care services posted the largest gains on a jump in the costs for physicians’ services. Hospital costs also moved higher; tending to COVID patients is extremely costly.

New and used vehicle prices both moved lower in January, but compared to a year ago, prices for used vehicles are still up at a double-digit rate. That reflects the shift to buying big-ticket goods by higher income households and the desire to avoid mass transit during the pandemic. Airfares dropped after picking up during the holidays and are down more than 20% from a year ago. Lodging prices fell with the faster-than-usual slowdown in post-holiday travel. Those prices are down more than 11% from a year ago.

The overall CPI and the core CPI both rose 1.4% from a year ago, which is still tepid. Those year-on-year gains will accelerate during the spring and summer compared to the sharp deceleration in prices a year ago. These are called weak “base” effects. They do not represent a surge in underlying inflation pressures. The Federal Reserve has already flagged the phenomena; the concern is that financial markets could misread those gains in the spring and summer as signs of broader based inflation. Remember, energy prices plummeted as the crisis gained momentum in the spring of last year.

 

 

Bottom Line

 

Inflation measures remain tepid, reflecting the inability of the economy to fully reopen. Sadly, the weakness in inflation tends to be in areas that most cannot benefit from, as they include airfares and hotels.

 

 

 

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Copyright © 2021 Diane Swonk – All rights reserved.  The information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic, financial, investment or any other decisions. This communication does not constitute an offer or solicitation, or solicitation of any offer to buy or sell any security, investment or other product. Likewise, this communication serves to provide certain opinions on current market conditions, economic policy or trends and is not a recommendation to engage in, or refrain from engaging, in a particular course of action.

 

Economic Bearings

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